Resolving Tax Debts is Easy: It’s All About the Process

By Eric L. Green, Esq.

  • Taxpayers often become frustrated and scared when dealing with the IRS on a back tax debt.
  • In reality, however, resolving a tax debt is reasonably straightforward and can save taxpayers from unnecessary distress.
  • A statutory lien is normally issued after tax returns are filed and payments must be arranged by the date prescribed by the final notice. If not, the IRS will resort to enforced collection action through issuing tax levies. Fortunately for the taxpayer, the levy can be reversed in the same way it can be avoided altogether – through tax compliance and request for a collection alternative. 
  • First, the IRS requires the subject meet tax compliance criteria with all current and future tax returns and tax payments.
  • After the tax return is filed, the IRS assesses the tax balance on the return, beginning a ten-year statute of limitations that influences the chosen collection alternative.
  • Generally, there are three “collection alternatives” and four basic types of installation agreements whereby the taxpayer repays the back-tax debt over time.
  • There may also be specific situations in which a taxpayer may be declared “uncollectable” or may request and receive an Offer-in-Compromise. 

“If I don’t file the IRS won’t know.  And if the IRS doesn’t know, then they can’t file liens against me, levy my bank accounts and ruin my marriage.  But I’m not worried; I will make it up and file next year.”

That conversation, usually inside the taxpayer’s head, takes place tens of thousands of times each year in October at the extension deadline.  The problem of course is the same taxpayer has neither paid the prior tax year nor (usually) made any current year payments, so they are really two years behind.  Two years becomes three, which becomes four.  Finally the IRS notice shows up in their mail box, or perhaps the Revenue Officer knocks on the front door.  Either way the client becomes hysterical and comes dashing in to see their accountant or tax attorney. 

Those who incur a tax debt may be unaware of the consequences, and uncertain of how to respond to the IRS as they receive threatening letters. The truth of the matter is that the process to resolve a tax debt is reasonably straight-forward but most taxpayers and practitioners do not deal with these issues, so the process can seem random and frightening. 

After the tax returns are ultimately filed a tax debt will be assessed.  The taxpayer will then receive a billing notice by mail.  Unless the taxpayer pays the tax, interest, and penalty in-full, a tax lien will arise automatically by statute.  This statutory lien, referred to as the “silent lien”, attaches to all of the taxpayer’s assets currently owned and after-acquired.   Of course, the only parties that know the lien exists are the IRS and the taxpayer, and often the taxpayer does not even realize the lien exists.  If the amount owed exceeds $10,000, the IRS will file a Notice of Federal Tax Lien (NFTL) in protection of its interest in the taxpayer’s property. This filing is recorded on both the land records of the taxpayer’s residence and with the Secretary of the State. 

After a number of notices are sent a “Final Notice of Intent to Levy” will be issued by the IRS. If either the back taxes are not paid by then or arrangements to pay have not been requested by the taxpayer, the IRS will resort to enforced collection action through issuing tax levies. Levies may include garnishment of wages, seizure of the available balance in the taxpayer’s bank account, and seizure of money owed to the taxpayer by third parties. Beyond a devastation of reputation, levies result in immediate economic devastation for the taxpayer.

However, a levy may be released if quick action is taken by the taxpayer and/or their representative. The recipient of the levy is required to take and hold the available funds for 21 days before sending it to the IRS.  This allows the taxpayer time to contact the IRS and get the levy reversed. The way a taxpayer has his or her levy released is the same way they avoid the levy in the first place: get into tax compliance and request a collection alternative to resolve the tax debt. 

Tax Compliance

 The first step to any resolution of tax debt is tax compliance. The IRS will not consider any negotiation if the subject is not in line with the following criteria: 

  • All tax returns due are filed 
  • If employed, sufficient taxes are withheld to cover the tax bill at the end of the year
  • If self-employed, estimated tax payments as required are made quarterly 
  • If a business, payroll taxes are timely deposited each period 

Of course, compliance means nothing to the IRS if not maintained. Any deal with the IRS will necessitate maintained compliance moving forward. This means that all future tax returns and tax payments are made timely.  Any failure to remain compliant results in the nullification of any collection deal with the IRS. This automatic default of the agreement leaves the client back to where they started. 

The Statute of Limitations

Once a tax return is filed the IRS will assess the tax balance on the return.  This will begin the ten-year collection statute.  The amount of time remaining on the collection statute determines which solution to the client’s tax liability is optimal. The Collection Statute Expiration Date (CSED) as well as the client’s Account Transcript can be obtained from the IRS upon request. This information will include when the return was received, when the tax was assessed, the penalty and interest charged, and payments received. Knowledge of this information will influence the chosen collection alternative. 

Collection Alternatives

There are three basic “collection alternatives” that taxpayers can seek to avoid having assets seized.  These include: installment agreements, uncollectable status, and Offer-in-Compromise. A fourth option of utilizing bankruptcy to potentially discharge some income taxes or force a payment plan on the IRS is available but is not something done with the IRS, and is beyond the scope of this article.   

Installment Agreements

An installment agreement is a payment plan whereby the taxpayer repays the back-tax debt over time. There are four basic types of installment agreement: 

  1. Automatic.  An ‘automatic installment’ agreement is available to taxpayers owing less than $10,000, being in compliance and without an installment agreement for the past five years, and will repay the debt back within three years.  
  2. Streamlined.  A ‘streamlined’ installment agreement is similar to automatic installment agreements, only differing in amount owed and required rate. Streamlined agreements are for those in debt of less than $50,000, in compliance and without prior agreement in the past five years, and in agreement to pay the full liability within 72 months.           
  3. Regular.  A regular installment agreement is an agreement created based upon the taxpayer’s ability to pay.  Here the taxpayer will be required to submit a financial statement (Collection Information Statement, Form 433) and a payment plan will be established based upon that information.  If that payment plan will result in full-payment, then the taxpayer should be all set with the IRS so long as they maintain their compliance and make their payments timely.
  4. Partial-Pay Installment Agreements (PPIA).A PPIA is exactly the same as a regular installment agreement except that the amount shown as available monthly will not result in full-payment of the tax debt.  The IRS will still set up the monthly agreement but will contact the taxpayer every 12-18 months to request updated information to see if the Taxpayer has the ability to increase their payment and potentially full-pay the tax debt.   

Uncollectable Status 

If the taxpayer in question has no equity in available assets and is unable to cover their IRS-deemed allowable expenses by income, they may be declared ‘uncollectable’, or CNC.  A Taxpayer deemed CNC would not have any enforcement action taken against them (ie. tax levies), and the ten-year collection statute would continue to run. 

Offers-in-Compromise

Offers-in-Compromise are popular yet misunderstood programs for debt collection. An Offer-in-Compromise is an agreement whereby the IRS agrees to resolve a taxpayer’s debt for less than the total owed.  The IRS bases its decision on accepting an Offer, and if so how much to accept, on a formula referred to as ‘Reasonable Collection Potential’, or “RCP”.  The Taxpayers RCP is calculated based upon net equity in assets and future income.  Taxpayers and their practitioners need to review this analysis and the amount of time remaining on the CSED to determine if an Offer makes sense for a client.

All things considered, a tax debt may be resolved as painlessly as possible when in compliance, in communication with a knowledgeable representative, and in appropriate procedure to secure the optimal resolution. 

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